You have searched for a house, but you cannot find a place that is affordable and ready to move into. It’s time to broaden your search to include fixers. There are more properties to choose from, and you can get a home improvement loan that combines the purchase price with the cost of upgrades.
Two options, the FHA 203 (k) ready and the Fannie Mae HomeStyle Loan, allow you to borrow money to buy and repair a house. And you can start renovations right after the loan closes.
The job does not have to be of legal age
Home improvement loans give you more home buying options by allowing buy fixatives and make repairs immediately. Loans can cover structural repairs, cosmetic renovations, and interim improvements.
“HomeStyle and 203 (k) loans can pay for structural repairs, cosmetic renovations, and interim upgrades.“
Structural repairs include work to make the house habitable. For example, replacing copper plumbing and electrical wires that were torn off while a house was vacant. Adding a room counts as a structural renovation.
Cosmetic renovations include things like replacing outdated kitchen cabinets. An example of an intermediate improvement is the replacement of the roof.
203 (k) and HomeStyle
Most home improvement mortgages are of two types:
FHA 203 (k) loans are mortgages insured by the Federal Housing Administration.
HomeStyle loans are mortgages guaranteed by Fannie Mae.
These two home improvement loans share many similarities. Among them:
Silver can be used for major structural repairs as well as cosmetic renovations (or a combination).
All renovations are done after the loan closes, not before.
If you can’t occupy the home during the renovations, you can add up to six months of mortgage affordable payments to your loan amount to pay off the mortgage on the new home while you live elsewhere.
The renovation money is put aside in an escrow account and contractors are paid in drawings when they reach milestones in their work.
Minimum down payments required are based on either the total cost of the purchase plus renovations, or the estimated estimated value of the home once the work is complete. Each loan uses a formula to decide which one to use.
How 203 (k) and HomeStyle differ
The differences between these loans lie in how lenient they are and how strict they are.
FHA 203 (k) loans are more lenient on the borrower’s credit and stricter on any renovations that can be done.
Fannie Mae HomeStyle mortgages are stricter on the borrower’s credit and more forgiving on any renovations that can be done.
Here’s how those differences dissipate:
Credit points: Borrowers with credit scores of 500 or more may be eligible for FHA 203 (k) loans. For HomeStyle loans, the minimum credit score is 620.
Deposits: For 203 (k) loans, the minimum down payment is 3.5% if your credit score is 580 or higher; it’s 10% if your credit score is between 500 and 579.
For HomeStyle, the minimum down payment is 3% if the home will be owner occupied and at least one borrower is a first-time buyer. There is an exception for Home Loans Loans, which have income restrictions. Otherwise, the minimum deposit is 5%.
Permitted improvements: 203 (k) loans cannot be used to pay for work that the FHA considers a luxury. Examples include installing a new swimming pool, adding an outdoor hot tub or sauna, or building an outdoor barbecue or fireplace. The repair of an existing swimming pool is authorized.
HomeStyle loans have few restrictions on improvements other than that they “should be permanently attached to the building (dwelling or land),” according to Fannie Mae’s guidelines. This means HomeStyle can pay for the addition of a new pool or permanent landscaping.
Types of residence: A 203 (k) loan is for a primary residence. He cannot pay to repair a vacation home or investment property. The house can be a single family home, condo, or other house in a one to four unit structure, or a qualified manufactured home. You can use a 203 (k) standard mortgage to tear down a house and rebuild it on the foundation.
HomeStyle can be used to renovate a second home or an investment property. The home can be a primary residence of one to four units, a secondary residence of one unit or an investment property, a manufactured home, or a unit in a qualifying condominium or co-op. You cannot use HomeStyle to demolish and rebuild the house.
Completion Status: With a 203 (k) loan, the house must have been completed for at least a year. A HomeStyle loan “can be used to complete final work on a newly built home when the home is at least 90% complete,” according to Fannie Mae’s Selling Guide.
FHA 203 (k) loans have two options
There are two types of 203 (k) loan: limited and standard.
The 203 (k) limited loan caps the cost of renovations at $ 35,000. It cannot be used for structural repairs, such as adding a room or moving load-bearing walls. There is no minimum repair cost.
The standard loan 203 (k) allows major structural work. Any project over $ 35,000 must be a standard loan, whether or not it involves structural repairs. Total upgrades must cost at least $ 5,000. A standard 203 (k) loan requires working with a HUD consultant, who manages the project.
Steps to follow
After finding the home you want, the first step in getting a home improvement loan is to apply to two or more lenders and compare their experience with those loans – their answers to your questions and their rates and fees. Once you choose a lender and decide on the type of loan:
Hire a consultant if you get a standard 203 (k) loan. The HUD website has a consultant search tool, and you should speak with your loan officer.
List the improvements you want to make, interview contractors and get cost estimates for the work.
Provide contractors’ estimates to the lender.
Close on the mortgage. Work can begin immediately after closing.